Measure Twice, Cut Once
Sales incentive plans (IC plans) are not a silver bullet. Nor are they error-proof. But given their importance to firm results, every proposed new IC plan should be tested before it is launched. Failing to thoroughly evaluate and assess the potential impact of a new IC plan can have a variety of possible adverse consequences. Not every contingency can be anticipated, but many can, and testing a potential plan makes it possible to avoid many adverse outcomes.
Estimating the cost of an IC plan is more complex than simply multiplying target pay by the number of salespeople. Forecasts may be inaccurate, causing pay to be either significantly above or significantly below target. In addition, even when forecasts are accurate, variation in performance across salespeople can cause average pay to deviate from target. With a progressive IC plan—one that pays salespeople at a higher rate after they achieve their goal—actual compensation costs when national goal attainment is 100 percent can be significantly higher than target pay times the number of salespeople. This happens because the accelerators at goal cause the salespeople who are above goal to exceed the target pay by more than the shortfall from target pay for those who are below goal.
Plan testing involves not only predicting the cost of the plan, but also estimating engagement, excitement, and other important metrics [used to assess plans]. Sales leaders can make these predictions and estimates by integrating historical salesperson performance data with future sales forecasts and using these data to evaluate the payout implications of the new IC plan. The tools and metrics suggested for assessing current IC plans are all relevant for evaluating proposed new plans before they are launched—including testing for a plan’s motivational power by measuring expected engagement and excitement levels and checking to ensure that the proposed plan pays for performance.
Testing also includes analyzing multiple what-if scenarios to ensure that a plan’s consequences are understood for a range of probable future outcomes. For example, what happens if the national sales goal is too aggressive—will salespeople still make money and be motivated by the plan? What if the goals are achieved too easily—will plan costs get out of hand? A thorough risk analysis helps sales leaders gain a better understanding of the consequences of incentive plans so that they can build in the needed flexibility. Sensitivity analysis is also useful for fine-tuning plan features. For example, sensitivity testing may reveal that plan cost, engagement, or excitement can be improved by adjusting the point at which payout begins or by making slight changes in commission rates.
Changes can be made to both mismeasured pieces of wood and IC plans. But neither is worth the time and money.
